Yves here. We have not written much about the BRICS project for a different currency because it seems to be very flexible, without the idea of developing information systems to increase the efficiency of bilateral trade. There are also many comments of poor quality, such as the articles of those who should know better who do not understand that SWIFT, and therefore another Russian messaging system, is seriously lacking in representing a payment system. SWIFT does not perform either of the two core functions, clearing and resolving.
I have investigated a bit, and it seems that it may not be easy to give a non-MEGO (My Eyes Are Shining With Power) about clearing and resolving, and a brief discussion may seem unsatisfactory in explaining the implications of the BRICS project. .
However, in the meantime, the article below shows how the BRICS players looked at other possible options and had to reject them. As this piece warns, a gold-backed scheme would be a major step backwards for BRICS (Michael Hudson has a similar view). However, it also indicates that Indonesia and other BRICS members or top candidates will oppose it.
It is Rendy Artha Luvian, who is doing his postgraduate studies at the Faculty of Social and Political Sciences at Gadjah Mada University. First published in Modern Diplomacy; Cross posted to InfoBRICS
From 22 to 24 October 2024, the BRICS summit will be held, with a key agenda discussing the possible use of a common gold-backed currency. BRICS, which is a group of countries including Brazil, Russia, India, China and South Africa, has played an important role in the world economy since its inception. Their main goal is to strengthen economic and political cooperation between member countries and to reduce dependence on the global financial system dominated by Western countries, especially the United States. The dominance of the US dollar as the world’s reserve currency and primary instrument of activity has created significant reliance on the financial system controlled by Washington.
The BRICS de-dollarization campaign aims to reduce dependence on the dollar and create an independent alternative for international transactions. Initial steps include the establishment of a New Development Bank (NDB) and the Planning of Potential Funds. However, these measures have not fully met initial expectations. The BRICS are now considering using a gold-backed currency as a more stable alternative, less affected by global political fluctuations. However, how will this affect countries like Indonesia? Will it provide an alternative to balance the international financial system or carry the potential for disaster?
The De-dollarization Initiative and Why the BRICS Are Considering a Gold-Backed Currency
One of the latest BRICS initiatives is to create a new payment system that does not require the US dollar. The program is designed to facilitate cross-border transactions using advanced digital technologies, including blockchain. Although the plan is still under development, there is speculation about the possibility of using a gold-backed currency as part of the plan.
A gold-backed currency can provide greater stability compared to fiat currencies, which are influenced by monetary policies and inflation. Gold has long been considered a reliable store of value and can act as a hedge against currency fluctuations. By linking the value of money to gold, BRICS hopes to create an alternative that can withstand the volatility of the global economy and the international sanctions that often affect member countries.
However, despite the backing of gold, the monetary system proposed by the BRICS will still be heavily dependent on interest rates, as interest rates will continue to play an important role. Over time, this reliance on interest-bearing mechanisms could lead to a gradual devaluation of the BRICS currency against gold. As financial institutions seek greater flexibility in response to market demands and economic growth, the temptation to increase capital or adjust monetary policy may destroy the original gold standard. This situation reflects historical trends where currencies, despite starting out as gold, eventually severed their ties to precious metals in favor of flexible, fiat-based systems.
The History of Gold in the International Monetary System
Gold has long been used as a medium of exchange and a store of value. In the history of the international monetary system, gold has played an important role as a global monetary standard, known as the Gold Standard. In 1944, the Bretton Woods Conference established a new international monetary system in which the US dollar became the base currency and was exchanged for gold at a fixed rate. This system gave the US significant leverage in international trade. Unfortunately, the dollar-to-gold exchange rate continued to rise, as more dollars were printed and circulated around the world than gold reserves were available.
This showed an abuse of power by printing too many dollars, even without enough gold to back them. Finally, in 1971, President Richard Nixon announced the elimination of the US dollar from gold (The Nixon Shock), starting an era in which the dollar became a fiat currency supported only by market confidence, not by gold reserves.
With this change, the US dollar became the primary currency for oil trading, leading to the name petrodollar, and the global financial system became more dependent on the dollar. This change has allowed the US to gain significant advantages, including the ability to run large trade deficits and impose economic sanctions on countries that oppose US foreign policy. International trade was conducted almost exclusively in dollars, even after it was delinked from gold. Oil maintained a dollar value thereafter because, before the COVID-19 pandemic, almost 100 percent of oil trade was done in US dollars. However, by 2023, it was reported that a fifth of oil trade was done in currencies other than the US dollar.
The instability caused by US monetary policies could have a major impact on the global economy, forcing countries like the BRICS to look for more stable alternatives.
Challenges and Risks of Gold Backed Digital Currency in BRICS
A gold-backed currency offers a variety of benefits, including price stability and protection against inflation. By linking the value of money to gold, BRICS can reduce volatility and create a stable alternative to fiat currencies. This can also help member countries reduce their dependence on the US dollar and improve their economic independence. Using a gold-backed coin in a digital system can combine the stability of gold with the efficiency of blockchain technology, which provides transparency and speed in international transactions. This system has the potential to increase the efficiency of international trade and reduce transaction costs associated with currency conversion.
However, using a digital currency backed by gold faces technical and regulatory challenges. Blockchain system security and data protection are the main concerns, as are potential issues related to the interoperability of existing international systems. Using a gold-backed digital currency as the basis for a BRICS currency would create risks related to the stability and integrity of the financial system. While blockchain provides transparency, there are risks associated with potential cyber attacks and system failures. Additionally, reliance on new technologies may pose challenges in integrating with existing global financial systems.
The next question that arises is whether the BRICS will repeat what the US has done in the past—printing and multiplying money recklessly, even without sufficient gold reserves to back it up. This ability may lead BRICS countries to the same trap, and Indonesia cannot avoid its connection with BRICS.
Indonesia’s Strategic Role
Indonesia has activated the LCT (Local Currency Transaction) National Task Force to strengthen the use of local currencies in international transactions. Involving the Bank of Indonesia and nine ministries/agencies, this effort aims to separate currencies in bilateral payments and increase the exchange rate. This move, which is in line with BRICS efforts to de-dollarize, shows Indonesia’s commitment to reducing reliance on the US dollar and supporting regional payment systems.
As one of the BRICS countries, Indonesia plays a strategic role in this dollarization process. By introducing special activities to support the use of Rupiah in bilateral transactions and to develop local payment systems, Indonesia is contributing to BRICS efforts to reduce dependence on the US dollar. These efforts include launching a cross-border payment system with Singapore and developing a universal QR code for regional payments in ASEAN.
The devaluation of the dollar could provide significant benefits to the BRICS countries, including Indonesia, by reducing exposure to US dollar fluctuations and economic sanctions. Additionally, by expanding intra-ASEAN and regional trade, BRICS can strengthen its position in the global economy and reduce dependence on Western financial systems.
It is important to be aware of what happened in the past. History has shown that major changes in the financial system can have far-reaching effects, both positive and negative. Relying on a particular currency or financial system can be easily manipulated. The potential success of the BRICS currency in breaking the power of the dollar in international trade is great as it has the potential for the BRICS to lead the world into a state of economic instability. The Nixon Shock proved how the tools of capitalism can manipulate the world; will the BRICS repeat the same move in the future, with money that can be printed by simply writing numbers on a screen, if they no longer care about the basic idea of using gold reserves?
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